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Justice Department may try to block T-Mobile/Sprint deal

The DOJ doesn't think FCC conditions will resolve antitrust concerns, according to reports.

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The Justice Department may try to block the Sprint/T-Mobile merger, according to a report.

Mandel Ngan / AFP/Getty Images

The US Department of Justice might want to put the kibosh on T-Mobile's merger with Sprint.

Staff in the agency's antitrust division have recommended that the DOJ sue to block the $26 billion acquisition, according to a report Wednesday from Reuters, citing two unnamed sources. The agency declined to comment, but this isn't the first report to suggest it could be leaning against the merger.  

On Monday, unnamed sources close to the Justice Department told Bloomberg the agency isn't satisfied with concessions that were offered to get the deal done because they don't go far enough to resolve antitrust concerns. T-Mobile agreed to include build-out requirements to ensure 5G deployment in rural communities, a promise to offer a wireless home broadband solution that could be a wireline substitute, and the divestiture of the prepaid brand Boost Mobile.

The company didn't agree to any conditions that'd result in the divestiture of wireless spectrum nor did the companies agree to conditions around its wholesale business or roaming arrangements with rural carriers, which were concerns that'd been raised by critics of the deal. 

The news comes after FCC Chairman Ajit Pai said he's giving the deal his blessing because it'd help further the agency's two main objectives: closing the digital divide in rural America and advancing the US leadership in 5G. Since his announcement, the other two Republican FCC commissioners, Brendan Carr and Michael O'Rielly, have said they also support the merger.

If the head of the Justice Department's antitrust division, Makan Delrahim, comes out against the deal, it'd be an unusual move. The FCC and the Justice Department usually work side by side on merger reviews and typically agree on whether to approve deals.

"If the DOJ opts to challenge the Sprint/T-Mobile transaction, it would represent a significant departure from long-standing practice," said Andrew Jay Schwartzman, of the Communications and Technology Law Clinic at Georgetown University.  "For many years, DOJ and the FCC have taken similar positions on proposed mergers.  Typically, DOJ has taken the first move, with the FCC following later."

Deal making and antitrust concerns

As part of the FCC's deal, the new T-Mobile has agreed to meet several 5G network coverage benchmarks. For instance, within three years the company will provide 5G service to 97% of the US population, and within six years 99%. For rural Americans, the coverage would be 85% within three years, and 90% within six.

T-Mobile has also promised to offer a broadband alternative to rural customers and has guaranteed that 90% of Americans will see mobile broadband service at speeds of at least 100Mbps if the deal is approved. In addition to promises for 5G rollout, T-Mobile has agreed to divest Boost Mobile, Sprint's prepaid provider and a rival to T-Mobile's own Metro.

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But critics say that none of these conditions address issues of competition.

"What the FCC has negotiated behind closed doors doesn't address the antitrust harms that are pretty evident and are part of the DOJ's mandate to review," Philip Berenbroick, senior policy counsel for Public Knowledge, said in an interview with CNET. "What the FCC has done is try to find things that they want the companies to do with regards to 5G and rural broadband so that they could put these in the column of wins for the Pai regime."

While T-Mobile agreed to divest its prepaid brand Boost, the merger would still reduce the number of nationwide carriers from four to three. In 2011, the Justice Department rejected AT&T's take-over of T-Mobile because it concluded it'd be bad for consumers. The Sprint/T-Mobile merger would also reduce the number of players in the wholesale wireless market and could possibly affect roaming rates for rural wireless carriers.

Critics like Berenbroick also point out that the FCC's conditions are unverifiable and full of loopholes. While the FCC says that T-Mobile has agreed to pay for network testing to verify build-out obligations and would be subject to annual fines up to $2.4 billion if it doesn't comply, there are loopholes in the fine print of the agreement that could allow the company to shirk its responsibilities, said Berenbroick.

Strange timing

Berenbroick also emphasized how unusual it is for the FCC to release its decision to back a deal ahead of the Justice Department, especially when the core issues center on antitrust concerns. He noted that in 2017 the FCC under Pai followed the Justice Department's lead in evaluating a merger between Level 3 and CenturyLink, a transaction that also relied heavily on antitrust and competition analysis.

"It's unclear why the chairman has issued his statement without referencing the DOJ's ongoing work on this matter," Berenbroick said.  

The DOJ has declined to comment. The FCC is also not commenting on why it issued its decision ahead of the DOJ. But a spokesman for the agency tried to downplay the situation during a call with reporters, saying the two agencies often release statements separately.

If the two agencies have reached different conclusions on the merger, it'd be a first, according to a research note written by Paul Gallant, an analyst with Cowen & Co., published ahead of the news that the DOJ may oppose the deal.

The split among the agencies would also mean that the DOJ will be forced to sue the companies to stop the merger rather than having the FCC refer the case to an administrative law judge for review. A court case is somewhat more favorable for the companies since a referral for review could take years and most companies withdraw their merger petitions when that happens.

Still, it's hard to know exactly what this DOJ will do. In his note, Gallant pointed out that Delrahim has proven to be unpredictable in the past. He shocked many when he sued in 2017 to block AT&T's merger with Time Warner. That deal, which combined companies that weren't in direct competition with each other, was given much higher odds of winning approval. Ultimately, the DOJ lost that case in court and the deal closed last year. 

Originally published May 20, 12:20 p.m. PT. 
Update, 4:04 p.m. PT: Adds comments as well as new and background information; May 22: Adds Reuters report about the DOJ, and DOJ declining to comment.